Moody's Investors Service would likely place GARVEE ratings under review for possible downgrade should the tax not be extended on a timely basis, affecting up to $13 billion currently outstanding. However, Moody's expects that there would be no immediate defaults among its rated Grant Anticipation Revenue Vehicles (GARVEEs) should the lapse in the federal gas tax be short-lived.

"A lapse in the federal gas tax would be unprecedented for GARVEEs and indicate heightened political risk of shortfalls in available funding to meet debt payments," says Julius Vizner, a Moody's assistant vice president and analyst "but we think this is an unlikely scenario."

The federal gas tax is set to expire on Sept. 30. GARVEEs, which are issued by many states and mass transit systems, are secured by payments from the federal Highway Trust Fund, which is funded primarily by the federal gas tax. Moody's rates 22 state highway and 6 transit agency bond programs backed by reimbursements of highway and transit aid paid from the federal Highway Trust Fund.

"A lapse lasting longer than three to four weeks would challenge our assumption that the essentiality of transportation infrastructure assures the continued flow of federal gas tax revenues to states and transit agencies," says Moody's Vizner. "It would also amount to a de facto reduction in spending by the forgone gas tax revenues."

In such a scenario, Moody's would likely downgrade by multiple notches those GARVEE programs that lack reserve funds or other mechanisms designed to cushion against an extended federal funding lapse.

If the gas tax is extended on a timely basis, Moody's expects to maintain the existing ratings on most of its GARVEEs. If Congress passes a multi-year reauthorization bill with sharp reductions to spending out of the Highway Trust Fund, however, the rating outlook

for GARVEEs with lower leverage constraints and weaker debt service coverage would likely be revised to negative.